Table of Contents

List of FiguresAcknowledgmentsForeword

The Great Recession: The damage done and the rotrevealed

The Great Recession’s Trigger: Housing bubble leads tojobs crisis

Fallout: the job-market

Fallout: broader measures of economic security—poverty, healthinsurance, and net wealth

The Policy Response to the Great Recession: What wasdone, and did it work?

The dynamics of the Great RecessionRecovery Act controversies: what was in it?

Recovery Act controversies: did it work at all?Recovery Act controversies: why has consumer and notgovernment spending led the recovery?

The Great Recession Ended More Than a Year Ago—so,“Mission Accomplished”?

Apathy, not overreach

Exchange rate policyMonetary policy

Fiscal policyClear economics, fuzzy politics

The Cracked Foundation Revealed by the Great RecessionFalling minimum wage

Assault on workers’ right to organizeGlobal integration for America’s workers and insulation for elitesThe rise of finance

Abandoning full employment as a targetYou get the economy you chooseIncomes in the 30 years before the Great Recession: growing slower andless equal

Is everybody getting richer but the rich are just getting richer faster?Why have typical families’ incomes and overall economic growth de-linked?

The arithmetic of rising inequality: falling wage growth for mostAmerican workers

The economics of rising inequalityLower wage growth did not buy greater economic security or sustainedprogress in closing racial gapsHow did American families cope with lower wage-growth and risinginsecurity?

Where to from Here?

BibliographyAbout EPIAbout the Author

The State of Working America Web site

List of Figures

Figure 1: Recession has left in its wake a job shortfall of over 11 millionPayroll employment and the number of jobs needed to keep up with the growth in working-agepopulation

Figure 2: 2007 recession causes largest increase in unemployment since WWIIUnemployment rate for total population, age 16 and older, 1948-2010

Figure 3: A more comprehensive measure of slack in the labor marketThe number of underemployed workers, including those unemployed, part-time for economicreasons, and marginally attached, 1994-2010

Figure 4: Not enough jobs for too many peopleThe job seekers ratio (the number of unemployed workers per every job opening)

Figure 5: Jobs fall further and longerIndexed job loss for four recessions

Figure 6: What will recovery look like?Three possible paths to recovery: following the path of recoveries in the ‘80s, ‘90s, and 2000s

Figure 7: Always an unemployment emergency for someUnemployment rates by race, 1972-present

Figure 8: Unequal burden of income loss over the Great RecessionChange in real median household income, by race and ethnicity, 2007-08 and 2008-09

Figure 9: Another casualty of the Great Recession—rising povertyThe percentage-point increase in the poverty rate following business cycle peak to height ofpoverty, working-age population, five recessions

Figure 10: Health coverage erodes—slowly and then quicklyRates of health insurance coverage, under-65 population, 2000-10

Figure 11: Household wealth declinesMedian net worth of households by race, 2001-09

Figure 12: What was in the Recovery Act?

Figure 13: What is the most effective stimulus?“Bang-for-buck” multipliers

Figure 14: Quarterly change in real GDP, consumption expenditures, and employment

Figure 15: Contribution of Recovery Act to GDP by the second quarter of 2010

Figure 16: Contribution of Recovery Act to employment by the second quarter of 2010

Figure 17: Percentage-point decrease in unemployment rate due to Recovery Act by the secondquarter of 2010

Figure 18: Recovery Act keeps spending power up even as market-based incomes collapse

Figure 19: Fast growth, falling unemployment; slow growth, rising unemploymentEight-quarter change in GDP growth and unemployment, 1983-present

Figure 20: Declining minimum wageThe real value of the minimum wage, 1960-2009

Figure 21: Declining unionizationUnion coverage rate in the United States, 1973-2009

Figure 22: Growing integration into the global economyImports and exports as a percent of GDP, 1947-present

Figure 23: Less manufacturing, more financeManufacturing and financial sectors as share of private economy

Figure 24: Missing the targetThe NAIRU versus actual unemployment rate

Figure 25: “Fast-and-fair” versus “slow-and-skewed”Real family income growth by quintile, 1947-73 and 1979-2009

Figure 26: Where did the growth go?Share of pre-tax income growth, 1979-2007

Figure 27: Small groups get the biggest gainsChange in average, pre-tax household income by income group, 1979-2005

Figure 28: What has the rise of finance bought? Not greater fixed investmentFixed investment and finance sector value-added as shares of GDP

Figure 29: The $9,220 inequality taxReal median family income and income assuming growth rate of average income

Figure 30: When jobs go down, poverty goes upPoverty and twice-poverty rates, 1959-2009

Figure 31: Another inequality tax—poverty no longer falls as economy growsActual and simulated poverty, 1959-2009

Figure 32: The wedge between overall and individual prosperityGrowth of production worker compensation and productivity, 1947-2009

Figure 33: Not just about getting a college degreeMedian hourly compensation by educational attainment and productivity growth, 1973-2009

Figure 34: Even the 95th percentile does not see wages keep up with productivityHourly wage and productivity growth by wage percentile, 1973-2009

Figure 35: Low-wage workers more vulnerable to unemployment changesPercentage change in male and female wages given 1 percentage-point decline in unemploymentrate, by wage decile

Figure 36: Falling unionization rates hurt lowest earners the mostUnion wage premium by wage percentile

Figure 37: The globalization tax for rank-and-file workersAnnual earnings for full-time, median wage earner

Figure 38: More compensation heading to the very topRatio of average CEO total direct compensation to average production worker compensation,1965-2009

Figure 39: The premium to working in financeRatio of earnings per full-time worker in finance versus the rest of the private sector

Figure 40: Three decades with no improvement in health coverageShare of under-65 population without health insurance coverage, 1959-2007

Figure 41: Pension coverage—roughly flat but riskierRetirement plans by type, 1979-2008

Figure 42: Even life expectancy gains are unequalLife expectancy for male Social Security–covered workers (age 60) by earnings group, 1972 and2001

Figure 43: Before the Great Recession, Americans saved less to consume morePersonal savings rate

Figure 44: Debt rises as income growth slowsThe ratio of household liabilities to disposable personal income, 1945-2009

Figure 45: In the late 1990s, stock bubble substitutes for savings

Cyclically adjusted price earnings ratio, 1947-2009

Figure 46: In the 2000s, housing market bubble substitutes for savings

A note on data sources and methods for the figures in this bookMost of the figures in this book are drawn from previous editions of The State of Working America.Those that are taken from other research are cited as such and a bibliography provided at theend of the book. For those readers interested in learning more about the sources and methodsbehind the construction of these charts, see the State of Working America Web site(www.StateOfWorkingAmerica.org). This book uses “typical” to mean median, that is, thefamily or worker in the exact middle of the distribution.

http://www.StateOfWorkingAmerica.org

Acknowledgments

It surprises me that even with the slimmest of books one accumulates amountain of debts, but so it goes. Although almost all of the larger insights inthis book are channeled directly from conversations with other EPIresearchers and writers, both past and present, I hesitate to list thembecause I might forget some. Among current EPI research staff, KathrynEdwards, Kai Filion, Elise Gould, Andrew Green, Larry Mishel, and HeidiShierholz all produced charts, provided data, or reviewed numbers for thebook. Ross Eisenbrey, Jody Franklin, John Irons, and Joe Procopio all readthe manuscript and offered helpful suggestions as well as generally helpedkeep the whole endeavor moving down the tracks. Anna Turner served asoverall general manager for the book—producing graphs, tracking downdata, reviewing the text, and fact checking everything. It probably would’vebeen very little extra work for her to have written the whole thing.

Despite all the valuable assistance I received, any bungles in translation arestrictly mine.

Finally, Holley and Finn continue to provide more-than-plausible excuses asto why I’ve yet to reach my full professional potential, and for this I couldn’tbe happier.

Foreword

For more than 20 years The State of Working America hasprovided an unvarnished look at the living standards oflow- and middle-income Americans. Along the way, it hasestablished a reputation as the gold standard in trackingtrends in income, wages, hours, jobs, and inequality,leading the Financial Times to call it “the mostcomprehensive independent analysis of the U.S. labormarket.” This effort has reflected two core values of theEconomic Policy Institute since its founding: (1) a beliefthat judgments on how well the economy is performingshould depend upon whether it is delivering rising livingstandards to the vast majority; and (2) the importance ofempirical documentation as the basis for economic policy.

More often than not over these 20 years, The State ofWorking America has detailed the data behind an economythat was not working particularly well for workingAmericans. Even during times of respectable economicgrowth for the nation as whole, typical families’ living

standards grew sluggishly. There were exceptions, to besure. The late 1990s saw low unemployment thatprovided even workers at the bottom-end of the wagescale with the bargaining power they needed to demandraises, and wage growth across the board was rapid andequitable.

Outside this brief window, however, the story of theAmerican economy since The State of Working America’sinception has been largely one of unfulfilled promise,with overall growth failing to translate into prosperity formost because the fruits of this growth were concentratedonly among those at the very top of the income ladder.

For 11 editions, The State of Working America hasdocumented the facts behind these trends, charting therapid rise of economic inequality and the much-less rapidrise of wages for most Americans. It has largely hewn topure documentation, with little narrative or policyprescription. However, after more than 20 years ofgrowing economic inequality and the worst recessionsince World War II, it became increasingly clear to us atthe Economic Policy Institute that there was an economicnarrative hidden between the lines of all the admittedlydry data. But, like the visual puzzles that embed a bigpicture in repeating patterns of shapes that obscure it,this story may not be obvious to those not looking for it orthose who just weren’t looking at the right angle.

Consequently, instead of a single massive tome, this latestincarnation of The State of Working America is a bundle ofproducts, both print and electronic. Most of the data thatthe book’s habitual users have become accustomed to willbe provided in a more widely accessible form: online in anew State of Working America Web site—both as the tablesand charts that traditionally formed the backbone of theprevious printed editions as well as being offered in rawform for more data-curious readers to do with what theywill. However, in addition to providing the data andanalysis, EPI believes that the unique circumstances oftoday’s economy beg for more interpretation, for anarticulation of the story behind America’s brokeneconomy. This book provides that story.

In Failure by Design, Josh Bivens takes an importantperspective-clarifying step back from the hundreds ofcharts in The State of Working America, and relates acompelling narrative of our country’s economy. The storythese charts tell us, he argues, is that our economic systemis “human-made,” designed by hand, so to speak. Theseoutcomes are subject to improvement going forward aslong as different choices are made. Bivens sketches outhow policy choices—such as allowing the minimum wageto be eroded by inflation, or tilting the law governingunions and collective bargaining strongly in favor ofemployers, or crafting rules governing globalization thatbenefit the already-privileged—have led to the

unfortunate outcomes documented in the 20-year historyof The State of Working America: slow growth of wages andincomes at the bottom and middle coupled withextraordinarily rapid growth at the top. Importantly,Bivens argues that these outcomes were predictable (andpredicted), and he provides clear evidence that you doindeed get the economy that you choose.

He also documents that these changes, besides beingdisadvantageous to rank-and-file American workers, alsoled to a more fragile economy for everybody. The truedanger of this fragility was devastatingly demonstrated bythe onset of the Great Recession, when a bubble in realestate, enabled by a financial sector allowed to self-regulate, turned into an economic disaster.

The life-span of The State of Working America has seen aconsistent movement in the American economy towardless-equal growth, and now, in the aftermath of the GreatRecession, Bivens argues that this movement only boughtthe economy much greater fragility. Bivens’ analysisstands firmly on the foundation provided by the work inThe State of Working America, but it takes a much morepointed policy stand on many of the issues we face. Giventhe stakes involved in choosing the economy we want aswe try to move out of the Great Recession, we thought itwas too important to allow the narrative being told inedition after edition to remain buried. Failure By Design is

our attempt to surface it. We think it is a vital counterpartto the ongoing work of The State of Working America seriesin documenting trends in incomes, wages, employment,and inequality—work that continues at the new Web siteand will be resumed in book form in 2012.

The policies that can lead to more durable economicgrowth that is more broadly shared are not rocket science:a minimum wage that can actually sustain families andthat is indexed to keep pace with broader economicgrowth; labor law reform that allows the 50% of private-sector workers who want to form unions to actually do sowithout fear of reprisal; trade agreements that extendprotections not only to multinational corporations but toAmerica’s workers as well; and regulation of the financialsector that made the crucial decisions that turned ahousing bubble into a historically bad recession. These areall policies high on the agenda of any progressive. WhatFailure by Design demonstrates, however, is how necessaryand how effective a new direction in economic policymaking can be. It is not that the economy has been brokenfor the last 30 years or so, but rather that it is working asit has been designed to work. During this time thereigning economic policy belittled the need for goodquality jobs and economic security. In fact, we were toldthat the various laissez-faire policies pursued—unfetteredglobalization, deregulation of industries, financial marketderegulation, a weakened safety net, and lower labor

standards for minimum wages, overtime, discrimination,safety and health, and privatization of public services—would all make us better off as consumers as goods andservices became cheaper. It turned out that thepredictable deterioration of job quality and greatereconomic insecurity created an economy that could onlygrow based on asset bubbles and rising household debt.For 30 years, policy levers have been pulled to help thewell-off, and this policy orientation worked spectacularlyon its own terms. It’s time to change the terms and startusing these levers to help everybody.

Lawrence MishelEconomic Policy Institute president and author of The State of Working America series

The Great Recession

The damage done and the rot revealed

The unemployment rate in the United States stood at 9.6% in August 2010,well over double the rate that prevailed in the same month in 2007, the yearbefore the Great Recession hit. August 2010 also marked the fifthanniversary of Hurricane Katrina making landfall on the Louisiana coast.Drawing parallels between Katrina and the Great Recession may sound likethe beginning of an argument for complacency in the face of the worsteconomic crisis since the Great Depression—after all, you can’t change theweather.

But the scale of damage done by Katrina wasn’t really about weather butrather the neglect of public goods and social institutions. The rain and winddidn’t manage to flood the city—the collapse of levees protecting it did. Theweather in the days before the storm didn’t prevent residents fromevacuating—many simply lacked the means or social networks that wouldhave allowed them to leave as easily as those who could pay for a hotel roomor call friends outside the city with extra rooms in their house.

This mirrors many important aspects of the Great Recession. Economicshocks happen—that will never change and is indeed “like the weather.” Butwhat determines how much human suffering these shocks leave in theirwake is driven by social and political choices about how the economy ismanaged. It was not inevitable that the significant run-up in home prices thatbegan in the late 1990s would end with more than 8 million Americans losingtheir jobs and unemployment hitting a 25-year peak.

When policy makers failed to rein in a financial sector that was making betson ever-rising prices, it proved ruinous for the larger economy: poor policychoices amplified what should have been only short-lived over-exuberanceamong home buyers and sellers into a full-blown economic crisis. In short, akey lesson to be taken both from the aftermath of Katrina and the GreatRecession is that blaming simple fate for what has happened absolves thosein power far too easily. The scale of casualties of both disasters weredetermined largely by political choices, not by immutable acts of nature.

Another striking parallel was revealed in the crises’ aftermaths. ManyAmericans following the news coverage of Katrina were shocked to see thedepth of poverty that many of their fellow citizens had fallen into.Thousands had been unable to flee the city simply because they lacked a car,money for a hotel room, or friends and family in locales safe from thestorm’s reach. In the aftermath of the Great Recession, it has becomeapparent that the neglect of our most vulnerable residents had left them onehard shove away from economic danger or even ruin—living without healthinsurance, having kids go hungry, evictions, or even flat-out poverty andbankruptcy. At the end of 2007, this hard shove came. This long-term neglectof vulnerable working families was matched only by our solicitude towardthe most-privileged: the dismantling of regulations on the financial sectorwas undertaken with key policy makers voicing confidence that it was “self-regulating” and could be trusted to police itself for the social and economicgood of all. Obviously, this was not the case. Ignoring the needs of the mostvulnerable and catering to the desires of the most connected surely hasnothing to do with the weather, or the market, or any other abstractionoutside of our control; it is simply a choice that our political leaders made.

In recent decades, Americans have been presented a number of false choices,false choices presented as gospel, with perhaps the most enduring being theclaim that a more fair economy would result in a much less efficient one.There’s no evidence to believe this is true—increasing opportunities forthose who haven’t won life’s lottery is as wise an investment for the future ascan be made, and too many of the actual inefficiencies plaguing our economyare those that put thumbs on the scale for the interests of the well-off.

Unfortunately, the project of decoding these false choices and charting a neweconomic path has to be started while the U.S. economy remains mired in aneconomic crisis. While the Great Recession officially ended in the middle of2009, the nascent recovery is weak and (at the time of this writing) evendecelerating. Worse, while the economic freefall of late 2008 and early 2009temporarily carved out political space to pass ambitious legislation aimed atrighting the economic ship—most notably the American Recovery andReinvestment Act (ARRA)—this political space is quickly getting squeezed bythe return of the conventional wisdom that has served working Americans so

poorly.

Much remains to be done simply to return the U.S. economy to its far fromideal pre-recession condition. But settling for a simple restoration of theflawed economy we had in 2007 would be a betrayal of American workingfamilies. Even during the official economic expansion of the 2000s, theAmerican economy was far from delivering a fair deal for most families. Itcould have, and should have, done better.

This book aims to provide readers with the evidence they need to evaluatethe economic policy choices ahead of us and to demand better outcomes—ensuring a robust recovery from the Great Recession as well as providing afirmer foundation for future growth that can be enjoyed by a much broaderrange of Americans.

These choices matter—the current precarious state of working America didnot come about by happenstance; rather it was the predictable outcome ofthe political choices made over the preceding three decades. When partisansof the status quo tell Americans that there is no alternative or thatremorseless economic logic demands our economy look exactly like it has forthe past 25 years, they are wrong. The economy that generated sub-paroutcomes before the Great Recession and that turned a housing bubble intoan economic catastrophe was designed. It was designed, specifically, toguarantee that the powerful reaped a larger share of the rewards of overalleconomic growth. And in this purpose it succeeded.

While it was designed to ensure that the already-rich claimed the lion’s shareof future growth, it was marketed as guaranteeing a more efficient economyfor all, so that even as the rich took a larger share, everybody would see risingliving standards as economic growth accelerated. This marketing campaignturned out to be as reliable as most marketing is in the end: not at all.

A new economic policy that prioritizes rising living standards for the many,not just the few, also demands conscious design. Too many Americans havebeen told for too long that any tinkering with the current design of theeconomy would be tantamount to killing the goose that lays the golden eggs.

In the aftermath of the Great Recession, the falsity of this claim should beclearer than ever. However, the failure of design in the American economyshould have been seen over most of the three decades preceding the GreatRecession as well. Income-growth of the vast majority of households laggedfar behind overall growth rates, while incomes at the very top swelled topreviously unimaginable levels. Growth in living standards could only bepurchased by most families through saving less or taking on more debt. Thevery definition of a failing economy should be that most families cannot relyon rising incomes to lift living standards as fast as the overall average. Fortoo long, we have graded the economy on a much more generous curve—whether or not it provided any growth at all, regardless of how fast thatgrowth was in historical context or how widely distributed it was.

During this time, it was the work ethic and stoicism of the American peoplethemselves that masked the economy’s mismanagement and unequalperformance, forestalling an outright crisis. They worked harder and longerand shouldered more debt and more financial insecurity as a means of copingwith a radical deceleration in the growth of hourly pay. Finally, even theseshock absorbers were completely overwhelmed by economic events when atthe end of 2007 a shockwave driven by cluelessness and greed on the part ofthe country’s financial elite broke the economy.

The Great Recession’s Trigger

Housing bubble leads to jobs crisis

December 2007 marked the official end of the economic expansion thatbegan in November 2001. The official end of the Great Recession occurred inJune 2009, making it the longest recession to hit the U.S. economy sincebefore World War II. This chapter details the damage done since therecession began and the failure of the recovery so far to repair it.

While an increase in housing foreclosures provided the spark, it was the pooreconomic choices and mismanagement of the previous decade that providedthe tinder for the ensuing conflagration. The economic expansion from 2001to 2007 was among the weakest on record in essentially every way thatmatters to working Americans. Growth in overall gross domestic product(GDP), workers’ salaries and benefits, investment, and employment were theworst of any expansion we have seen since World War II. Typical familyincomes grew by less than half a percent between 2000 and 2007— only aboutone-tenth as fast as the next worst business cycle on record. From theperspective of America’s working families, the economic expansion of the2000s essentially represented a lost decade of growth.

It didn’t have to be that way. Policy makers found plenty of resources tothrow at tax cuts aimed disproportionately at corporations and the very richand at wars abroad. And when partisan politics demanded it, resources werealso found to enhance Medicare coverage by adding a prescription drugbenefit—but only when bundled with flagrant giveaways to pharmaceuticalcompanies and other corporations. If even a fraction of these resources hadfound their way into well-targeted interventions to boost the job market, thedecade could have been very different, with wage growth supporting livingstandards instead of debt.

But faster wage growth would, of course, have threatened the only economicindicators that performed above-trend in the 2000s: growth in corporateprofits, which during the 2000s saw the fourth-fastest growth of the 10expansions in the post-war period. These profits were led by the financialsector, which saw its share of overall corporate profits hitting all-time highs.

These financial profits were realized largely due to ever-growing returnsearned from extending loans to cover the skyrocketing cost of houses, as abubble in home prices replaced the bubble in stock market prices that hadburst in 2001. From 1997 to 2006, inflation-adjusted home prices, which hadfor decades grown at the typical rate of inflation, nearly doubled.

Besides boosting the bottom line of financial corporations, rising home pricesgave American families the chance to borrow against the equity in theirhouses and give a boost to their living standards, a boost that the broadereconomy had not afforded them, for example, through rising employmentopportunities and wage growth.

And borrow they did—at the height of the housing bubble an amount equalto almost 8% of Americans’ total disposable personal income was beingextracted from homes. In short, Americans were using the housing bubble to givethemselves the 8% raise that the job market, hampered by anemic growth, wasnot generating for them.

Once housing prices stopped rising, however, there was no more equity toextract, and the disadvantage of relying on increasing debt, rather than risingwages, as a means to purchase better living standards became clear.

Millions had been sold mortgages that ballooned in the second or third year,making them unaffordable and requiring those families to seek refinancing.But this refinancing was only possible while rising home prices gave themequity in their homes. With the end of rising housing prices, this game ofmortgage hot potato ground to a halt, and millions found themselves stuckwith mortgages they couldn’t afford or refinance. Just as rising housingprices boosted wealth and spurred economic activity, their declineextinguished wealth and brought the economy to a shuddering halt.

Roughly $8 trillion in housing wealth will likely be erased between thehousing market’s peak and trough. As American families saw their wealthfading away, they pulled back on their spending—cutting roughly $600billion in consumer spending from the economy. And the over-building ofhouses (and corporate real estate) during the bubble meant that this sector

contracted by about $600 billion annually as well.

Business investment in equipment and software also collapsed as customersdried up and existing factories and offices went idle. During the depth of thefinancial crisis, firms were threatened with difficulty just maintaining thecash and credit flows needed to keep their operations running.

That the 2000s economy depended on an unsustainable housing bubble ispainfully obvious in retrospect and was actually pointed out in real time bymany. What is less clear is what we as a society will learn from this episode toguide future choices. Many have tried to make the case that the root of theproblem was some moral shortcoming of Americans—instead of waiting toearn the money to consume the better things in life they took anirresponsible short-cut that was bound to end in catastrophe.

This view should be soundly rejected. Was it unwise for Americanhouseholds to take on more debt to buy homes that would end up worth lessthan what was paid for them? Of course. But did the economic policy-makingelite or the chattering class try to warn them about this as it unfolded? Tothe contrary, economic elites either ignored or even sneered at anyonewarning of a housing bubble; and the most elite of all, Alan Greenspan, thelegendarily influential chairman of the Federal Reserve, actually counseled in2004 for potential homebuyers to take on more debt with less stable interestrates in order to be able to afford even more expensive houses. Furthermore,the notion that today’s Americans are less patient than their forebears ishard to square with the fact that typical family incomes and living standardshave grown (even with the fuel of the housing bubble) at just a fraction ofthe pace that characterized the economies that their parents andgrandparents grew up in.

The moral of the 2000s economy has little to do with the typical American’s“character” and much to do with how the economy is managed, specificallythe choices regarding who reaps the economy’s fruits. When the financialsector wanted to roll back regulations to enable them to extend even riskierloans, which led to the disasterous housing bubble, the regulators gave in.This was a policy decision with consequences beyond the financial sector.

When this sector also benefited from a flood of cheap loans from abroad thatresulted in the dollar rising to levels that ruined the prospects for U.S.manufacturers, their desire to keep the foreign spigots on trumped the pleasfrom manufacturing companies and workers to stem the flow. And when the2001 recession was accompanied by the longest jobless recovery in history,instead of funding investments in safety nets and infrastructure that wouldhave boosted the job market and quickly reduced unemployment, we got taxcuts that disproportionately benefited the already affluent. Again, a policychoice with distinct economic consequences was made.

In short, the anemic expansion from 2001 to 2007 was founded on anunsustainable housing bubble, but this bubble was allowed to swell todisastrous proportions because policy makers chose to allow it. The resultingGreat Recession should make fully clear that nothing about economic outcomesis pre-ordained. Our leaders failed to make the tough choices in favor of theAmerican people and instead sided with the rich and powerful. This led theeconomy to ruin.

As we move forward, it is time to remember how important these choicesare. The rest of this section details the damage done by the Great Recession.Sections that follow will show how the previous 30 years of economicmismanagement resulted in a cracked foundation that was unable towithstand the economic shock that led to the Great Recession.

Fallout: the job marketBy now, most know that the Great Recession resulted in shocking amountsof job loss. What is perhaps less well-known is just how historically large thejob loss and concomitant rise in the unemployment rate have been. Anotherdisturbing feature of the Great Recession is that it follows two recessions inwhich the recovery in jobs was painfully slow relative to the post-World WarII norm. If recovery from the Great Recession continues this pattern, thesheer size of the resultant jobs gap means that it could well be a decade or morebefore the pre-recession unemployment rate is restored unless policy makerstake much more aggressive steps to jumpstart this recovery.

While the Great Recession was in many ways a broad-based catastrophe,affecting all racial and socioeconomic groups adversely, it continued thefamiliar pattern of inflicting the most damage on those who were mostvulnerable and had been suffering the most even before the recession. Forexample, the unemployment rate for African Americans has risen more than50% faster than the rate for white workers, and incomes for typical AfricanAmerican families have fallen much further between 2007 and 2009 thanincomes for white families.

FIGURE 1

Recession has left in its wake a job shortfall of over 11million

Payroll employment and the number of jobs needed tokeep up with the growth in working-age population

Source: EPI analysis of Bureau of Labor Statistics data.

Figure 1: This chart shows total payroll employment from2000 until August 2010. Besides the 7.6 million jobs lostduring the Great Recession, the dotted trend line reflectsthe fact that to keep the unemployment rate stable theeconomy needs to create more than 100,000 jobs permonth just to keep pace with growth in the working-age

population. Getting the job market back to its pre-recession health will thus require 11 million jobs—7.6million jobs lost plus 3.3 million jobs needed for newlabor market entrants.

FIGURE 2

2007 recession causes largest increase inunemployment since WWII

Unemployment rate for total population, age 16 andolder, 1948-2010

Note: Shaded areas denote recession.

Source: Bureau of Labor Statistics, Current Population Survey.

Figure 2: Unemployment has soared during the GreatRecession. It reached a 26-year peak in 2009, and theincrease over the pre-recession rate is the largest since theGreat Depression.

FIGURE 3

A more comprehensive measure of slack in the labormarket

The number of underemployed workers, including thoseunemployed, part-time for economic reasons, and

marginally attached, 1994 - 2010

Note: Shaded areas denote recession.

Source: Bureau of Labor Statistics, Current Population Survey.

Figure 3: The unemployment rate by itself masksimportant dimensions of labor market distress. Besidesthe jobless, the Great Recession has resulted in a verylarge rise in workers who would prefer full-time work but

can only find part-time jobs and jobless people who arewilling and available to work but are not formallyclassified as unemployed because they are not activelyseeking jobs. In short, the underemployment rate hasrisen in lock-step with the unemployment rate.

FIGURE 4

Not enough jobs for too many peopleThe job seekers ratio (the number of unemployed workers

per every job opening)

Note: Shaded areas denote recession.

Source: EPI analysis of Bureau of Labor Statistics data.

Figure 4: Why is it so hard to find work? Because inAugust 2010 there were roughly five unemployed workersfor every job opening in the economy. To be clear—theseare actual unemployed workers, not applicants. Therecould well be dozens of applicants for each opening aseach unemployed worker may send out multiple

applications.

FIGURE 5

Jobs fall further and longerIndexed job loss for four recessions

Source: EPI analysis of Bureau of Labor Statistics data.

Figure 5: The scale of job loss in the Great Recessiondwarfs that of previous recessions.

FIGURE 6

What will recovery look like?Three possible paths to recovery: following the path of

recoveries in the ‘80s, ’90s, and 2000s

Source: Author’s analysis of Bureau of Labor Statistics data.

Figure 6: Like the previous two recessions, the currentrecession has been characterized by very slow labormarket recoveries. If jobs are added only at the pace thatcharacterized the recoveries of the early 1990s and early2000s, because of the much greater scale of job loss in theGreat Recession it could be well into the next decadebefore we regain all the lost jobs.

FIGURE 7

Always an unemployment emergency for someUnemployment rates by race, 1972-present

Source: Author’s analysis of Bureau of Labor Statistics data.

Figure 7: The full complement (53 weeks worth) of“emergency” unemployment compensation has beenautomatically triggered in the Great Recession in stateswhere the overall unemployment rate exceeded 8.5%.However, the unemployment rate for African Americanshas been lower than 8.5% for only 45 of the 369 monthssince 1979, or roughly 12% of the time.

FIGURE 8

Unequal burden of income loss over the GreatRecession

Change in real median household income, by race andethnicity, 2007-08 and 2008-09

Source: Author's analysis of U.S. Census Bureau data.

Figure 8: Income losses for the median African Americanfamily since the Great Recession began have been roughlytwice as large in percentage terms as those for whitefamilies.

Fallout: broader measures of economic security—poverty, health insurance, and net wealthThe failures in the job market both cause and exacerbate economicinsecurity. The loss of jobs, the cutback of hours, and the reduced bargainingpower of workers have led to a sharp increase in those living in poverty andgoing without health insurance. Falling household incomes also mean asharp reduction in the typical nest-egg accumulated by families over the pastdecade. All of this has made economic life much more insecure for America’sworking families.

This erosion of security follows a weak expansion that saw few, if any,durable gains made in any of these areas. (The gains in typical families’ networth during the 2000s were overwhelmingly driven by the housing bubbleand have largely been erased now.) The poverty rate and the share of thosewithout employer-provided health insurance actually rose during theexpansion. Family incomes were essentially flat. In short, by these measures italready seemed like a lost decade of economic growth for many Americans.The Great Recession all but ensures that the coming decade will also bedevoid of progress for working families.

FIGURE 9

Another casualty of the Great Recession—risingpoverty

The percentage-point increase in the poverty ratefollowing business cycle peak to height of poverty,

working-age population, five recessions*

* The data labels show the total increase in poverty, from the business cycle peak to the povertypeak, and the year in which it was reached. For the current downturn, poverty is projected torise until 2011. The largest increase, 1979-1983, occured over two recessions, one in 1980 andthe second in 1981.

Source: EPI analysis of U.S. Census Bureau data.

Figure 9: Poverty predictably rises as the labor marketdeteriorates. The increase in poverty among the working

age population that has occurred since the start of theGreat Recession ties for the largest on record.

FIGURE 10

Health coverage erodes, slowly and then quicklyRates of health insurance coverage, under-65 population,

2000-10

Note: Dashed lines represent EPI's projections of rates in 2010.

Source: Author's analysis of the Current Population Survey, Annual Social and EconomicSupplement.

Figure 10: Employer-sponsored insurance was erodingeven during the weak economic expansion of the 2000s.This erosion became a landslide in 2009. While publicinsurance expansions took up some of the slack, fallingjob-based coverage led to large overall declines incoverage as well.

FIGURE 11

Household wealth declinesMedian net worth* of households by race, 2001-09

* Net worth is defined as total assets less total liabilities.

** 2009 data are estimated based on asset changes from the Federal Reserve Flow of Funds data.

Source: EPI (Wolff ) analysis of Survey of Consumer Finances data.

Figure 11: The bursting housing bubble led to sharpreversal in net worth for American families.

The Policy Response to the Great Recession

What was done and did it work?

While the official beginning of the Great Recession is the first month of2008, the first defensive actions traditionally taken to fight recessions—cutsin the short-term interest rate controlled by the Federal Reserve—werealready well underway by then. As the first ripples of the housing bubble’sburst were felt in the financial sector, the Federal Reserve (exquisitelysensitive to the needs of banks and financial institutions) had begunaggressively cutting rates months before.

The rationale behind interest rate cuts is that cheaper debt will spur familiesto buy more houses and durable goods (like cars) that require financing andwill also induce businesses to borrow to undertake increased investment inplants and equipment.

However, falling home prices meant that even interest rate cuts wereunlikely to convince households to buy into the housing market, nullifying akey channel through which the Federal Reserve can boost the economy.Worse, cuts to short-term interest rates have a limit—they cannot fall belowzero; who would pay a bank to hold their money for them when they couldjust buy a safe? Interest rates ran up against these limits early on while theeconomy continued to spiral downward.

Job loss accelerated at a terrifying rate in late 2008. In November, December,and January 2009—roughly between the election and the inauguration ofPresident Barack Obama—more than 2 million jobs were lost. The worseningcrisis led to the formation and passage of the American Recovery andReinvestment Act, or simply the Recovery Act. Since its passage, the RecoveryAct has been a focus of much controversy.

In fact, the theory behind the Recovery Act is basic economics, but a kind thatdoes not always make intuitive sense to many. As private households andbusinesses reduce their spending and try to work off their overhang of debt,the only way to keep unemployment from spiking is to have the public sectorfill the gap by increasing its debt and using it to finance spending on safety

net programs, investments, or tax cuts. Increasing public debt to cushion theeconomic shock of falling private debt might sound wrong to many, but it’snot. It is the only way to push back against rising unemployment until theprivate sector has paid down enough of its debt to begin spending again.

The dynamics of the Great RecessionThe specific problems stemming from the bursting of the housing bubble are(a) with less wealth, households have pulled back on spending, (b) afteroverbuilding, home builders have radically downsized, and (c) because of (a)and (b), future customers are scarce so businesses have cut back investmentsin plants and equipment. All of these things undermine demand for goodsand services in the economy, and this fall-off in demand for economic outputmeans that demand for workers falls in turn, leading to job loss and a spike inthe unemployment rate.

To ensure that demand doesn’t remain so low that it worsens unemploymentrequires finding a replacement for the consumer and business spending thatwas extinguished by the bursting of the housing bubble.

Increasing exports could in theory have been such a replacement, but giventhe huge size of the U.S. economy, the fact that most of what is produced andconsumed here is still domestically made, and that the Great Recession hadspread globally, there just weren’t enough foreign consumers to plausiblyallow exports alone to pull the economy out of recession. This crosses offthree recession-fighting strategies from the list: increases in purchasingpower fueled by consumers, by businesses, and via exports. This leavesincreasing purchasing power fueled by public funds. And since we don’t wantto neutralize the demand-generating impact of this public purchasing powerby raising taxes (which shrink private disposable income, the precise oppositeof what is needed), this public expenditure should be financed by debt.

The public funds should be well-targeted: tax cuts and government transfers(unemployment insurance, food stamps, payments to Social Securitybeneficiaries, Medicaid and Medicare) should go to those most likely to spendthe money quickly, and direct government spending should go to those

projects that will both create jobs in the short term and make us moreproductive for the long term. But, in the end, what works to end recessionsthat prove immune to conventional actions by the Federal Reserve is a publicsector that leans against the headwind of reduced private spending byincreasing its own spending.

It is clear that this works. Macroeconomic researchers at Goldman Sachshave noted that the shock to private sector spending caused by the burstingof the housing bubble is actually larger than the shock that led to the GreatDepression. However, because falling incomes also led to falling taxcollections, and because falling incomes and joblessness led to automaticincreases in safety net programs like unemployment insurance and foodstamps and Medicaid, this led to a purely mechanical increase in the federalbudget deficit of roughly three-quarters of a trillion dollars. These automatictax reductions and transfer payments buoyed private households’ disposableincomes and acted as a powerful shock absorber against the damage wroughtby the bursting housing bubble.

One testament to the fact that rising budget deficits act as a shock absorberagainst collapsing private-sector spending is the fact that essentially noprofessional economist criticized the increase in the budget deficit that arosebefore the passage of the Recovery Act; one can find almost nobody arguingthat policy should have kept the budget deficit from rising between January2008 and February 2009.

The Recovery Act represented the correct assessment by policy makers thatthe shock absorption provided by the purely mechanical rise in the deficit wasnot sufficient, even when paired with the interest rate cuts undertaken bythe Federal Reserve. So, policy makers rightly aimed to provide an even largercushion to the economy with the Recovery Act. Despite being premised onexactly the same theory as the rationale for automatic stabilizers, because ithad a clear political sponsor (the Obama administration), the Recovery Actbecame flypaper for criticism of all kinds.

Recovery Act controversies: what was in it?

One controversy surrounding the Recovery Act concerns the composition ofthe Act, with many critics arguing that it was too heavily weighted towardspending at the expense of tax cuts to stimulate the economy. However, lessthan 15% of the Act’s appropriations have actually funded direct governmentspending. More than a third of the appropriations were for tax cuts, whilethe remainder went to transfer payments to individuals and states.

Besides simply being wrong, this criticism is ironic given that mostmacroeconomic research indicates that increasing the debt to pay for tax cutsis a less efficient way to generate output and jobs than direct governmentspending. Compounding this irony, the tax cuts preferred by many of theAct’s critics—those going to businesses—were far and away the least effectivestimulus included in the Act. Tax cuts are less efficient job creators(especially those not targeted to lower-income households) because they maybe saved instead of spent, and because many of the business tax cuts wereessentially windfalls (often retroactive), rewarding activity that would havebeen done (or had actually already happened) even without the Act.

FIGURE 12

What was in the Recovery Act?(Billions of dollars)

Source: Blinder and Zandi (2010).

Figure 12: Contrary to most impressions, tax cuts werethe single-largest category of the Recovery Act andinfrastructure spending was less than 15% of the package.

On the other hand, safety net programs—such as unemployment insurance,nutrition assistance, and health insurance supports—are by definition well-targeted: they go to those families whose incomes have fallen below athreshold or who have recently suffered job loss. Consequently, recipientsare much more likely to spend these payments—they have to. And in termsof making sure that all increases in public debt are spent, infrastructurespending is best of all—none of it can be saved; it all must be spent.

In essence, if Congress had included more tax cuts aimed at high-incomehouseholds and businesses, the effectiveness of the Recovery Act would havebeen seriously reduced. Given that the next criticism of the Recovery Actargues that it was ineffective, it is more than ironic that these two arguments(“more tax cuts, more effective”) generally get peddled by the same criticwithin the space of a couple of sentences.

Recovery Act controversies: did it work at all?Most of the controversy surrounding the Act concerns whether or not ithelped at all to stabilize economic output and create or save jobs.

A facile debate technique used by those contending that the Recovery Act didnothing invokes the Obama administration’s (admittedly ill-advised) forecastthat the unemployment rate would rise to roughly 9% if the Recovery Actwas not passed and would not reach 8% if it was enacted. Whenunemployment peaked at 10.1% after its passage, many critics pounced,sometimes going as far as to claim that it had even somehow made thingsworse.

The problem with this interpretation is that it fails to consider the fact that itwas not the Recovery Act that failed, but rather the imagination of economicforecasters (both within as well as outside the Obama administration) abouthow much damage the collapsing housing bubble would do to the economy.In short, the difference between an economy with and without the RecoveryAct has come in just as advertised: the economy has between 3 to 4 million jobsmore than it would have had if the Act had not passed.

FIGURE 13

What is the most effective stimulus?"Bang-for-buck" multipliers*

* Measures total increase in economic activity associated with a $1 increase in the deficit.

Source: Congressional Budget Office data.

Figure 13: Economic forecasters agree that directspending and safety net supports are the most effectivekinds of economic stimulus, while tax cuts to the well-offand to business are the least effective.

FIGURE 14

Quarterly change in real GDP, consumptionexpenditures, and employment

Source: EPI analysis of Bureau of Labor Statistics data and Bureau of Economic Analysis data.

Figure 14: Growth in GDP, consumer spending, andoverall employment jump up markedly when RecoveryAct spending takes effect in the second quarter of 2009.

FIGURE 15

Contribution of Recovery Act to GDP by the secondquarter of 2010

Source: Data from sources listed above.

Figure 15: Among those who get paid to forecast wherethe economy will be quarter-to-quarter and to know whatdrives changes, there is a consensus that the Recovery Actadded markedly to economic growth.

FIGURE 16

Contribution of Recovery Act to employment by thesecond quarter of 2010

Source: Data from sources listed above.

Figure 16: The economic growth generated by theRecovery Act supported job growth, leading to millions ofworkers having jobs because of the Act.

FIGURE 17

Percentage-point decrease in unemployment rate dueto Recovery Act by the second quarter of 2010

Source: Data from sources listed above.

Figure 17: New jobs created by the Recovery Act kept theunemployment rate from rising even further than it did.

The underlying trend of the economy, however, was far worse than mostforecast. The unemployment rate without the Recovery Act would havereached nearly 12%, not the 9% foreseen by the Obama administration.

A good metaphor for this controversy is the temperature in a log cabin on acold winter’s night. Say that the weather forecast is for the temperature toreach 30 degrees Fahrenheit. To stay warm, you decide to burn three logs inthe fireplace. You do the math (and chemistry) and calculate that burningthese three logs will generate enough heat to bring the inside of the cabin to50 degrees, or 20 degrees warmer than the ambient temperature.

But the forecast is wrong—and instead temperatures plummet to 10 degreesoutside and burning the logs only results in a cabin temperature of 30degrees. Has log burning failed as a strategy to generate heat? Of course not.Has your estimate of the effectiveness of log burning been wildly wrong?Nope—it was exactly right—it added 20 degrees to the ambient temperature.The only lesson from this is a simple one: since the weather turned out worsethan expected, you need more logs.

What is often unappreciated in public debate is that this perspective—thatthe economy needed more, not less stimulus—is the essential consensusamong economic forecasters, both private and public. It is also the consensusthat the Recovery Act largely worked as advertised—creating or saving 3-4million jobs by June 2010. In short, for those whose salary depends onknowing what moves the economy from quarter to quarter, there isunanimity that the Act saved or created millions of jobs.

Recovery Act controversies: why has consumer and notgovernment spending led the recovery?Another common criticism of the Recovery Act is that because the recoveryhas mostly been led by a rebound of consumer spending, and not by federalgovernment spending, then the Recovery Act cannot be the source ofrecovery. A related criticism looks at the direct spending tracked by the

Recovery.gov reporting system and points to the fact that fewer than amillion jobs have been linked to the Recovery Act.

These criticisms fail to understand the components of the Act. Again, thelion’s share of Recovery Act spending actually financed tax cuts and transfersstraight to households, not direct government spending. Since the singlelargest component of Recovery Act spending was tax cuts and transfers toindividuals, it is here that the Recovery Act’s “footprint” should be the largestif it was effective; and this is exactly where it is the largest.

A proxy for market-based incomes (known as personal income minustransfers) cratered during the Great Recession, falling by more than in anyprevious recession. Yet, disposable income (i.e., the income that householdsactually have available to spend) held up well and was actually higher in June2010 than at the beginning of the recession. This was made possible by thetax cuts and transfer payments (both those that kick in automatically as wellas those that were part of the Recovery Act) taking effect during therecession and through 2009. In short, this support of private spending is thepredictable outcome of slanting the Recovery Act so far toward tax cuts andsafety net spending.

FIGURE 18

Recovery Act keeps spending power up even as market-based incomes collapse

Source: EPI analysis of Bureau of Economic Analysis data.

Figure 18: Contrary to most impressions, the primary“footprint” of the Recovery Act should be seen in higherdisposable incomes for households, not in increasedgovernment spending. This chart shows that as marketincomes fell (personal incomes minus transfers) theresources available for households to spend (personaldisposable income) actually held up well over the courseof the recession, buoyed by both tax cuts and transfer

payments in the Recovery Act.

The Great Recession Ended More Than aYear Ago—so, “Mission Accomplished”?

The official recovery from the Great Recession began in the middle of 2009.So, is the work of policy makers done?

Not by a long shot.

The Recovery Act stopped the downward spiral, but unless further action istaken to spur job growth, then the unemployment rate is likely to hoverbetween 9.5% and 10% for the next year, making it two straight years at thiselevated level. This extended period of high unemployment will continue toinflict great damage and cause insecurity among America’s working families.Wages, incomes, poverty, and health insurance coverage all moved in thewrong direction following the sharp rise in unemployment caused by theGreat Recession. Unless there is a rapid reversal there will be littleimprovement in any of these. Worse, if unemployment remains high for toolong, permanent scars will develop—lifetime earnings will be lower, peoplewill fall into poverty traps, and the formative years of children’s lives will bemarked by stress, frequent moves between schools that impede learning, andless consistent access to health care.

Apathy, not overreachIn short, the one valid criticism of what has been done so far by policy makersis not that it constitutes overreach, but in fact that it is not nearly enough.While the initial actions of the Federal Reserve and the passage of theRecovery Act were serious responses to events occurring in real time, it hassince become crystal clear that they were still not enough to bring theeconomy quickly back to health. For some reason, however, because thepolicy responses to the Great Recession were (by some measures) larger thanduring previous recessions, there is great reluctance to do more. But theGreat Recession is far larger than previous recessions, so “larger than whatwe’ve done before” is a strange benchmark to apply. Imagine waterovertopping a levy built to contain a flood. Some begin arguing that more

sandbags should be filled to add height to the levy. Others argue “but this isthe tallest levy we’ve ever built, so we should stop.” Which approach makesmore sense?

Going forward, building a taller levy requires a combination of moreaggressive fiscal policy support, exchange rate policy that allows us to narrowthe trade deficit and keep demand from leaking abroad to our tradingpartners, and a Federal Reserve that goes far beyond its traditional remedy oflowering short-term interest rates to more aggressively providing monetarystimulus to the economy. This combination of policies should be continueduntil the economy recovers. However, it is clear to anybody who has followedeconomic policy making in recent decades that each of these maneuverswould represent a substantial break from the orthodoxy that has prevailedduring the past 30 years. These political and ideological barriers to soundeconomic policy are inflicting a huge cost today. Over the past three decades,many of the bad economic choices that once were hotly contested havebecome so ossified that they have become a seemingly permanent part of theeconomic landscape. This has kept the economy from reaching its potentialfor working families. There is a danger that these failed policies will beperpetuated even today—already key policy makers seem by their actions tohave thrown up their hands and declared nothing can be done to push downthe 9.6% unemployment rate. If this complacency is not contested, thentolerance of extremely high unemployment will quickly become the “newnormal.”

Exchange rate policyIt is clear by now that the chronic trade deficit is a problem for the U.S.economy. The cause of this deficit is simply that the U.S. dollar is priced toohigh in world markets—U.S. exports are too expensive for trade partners,foreign imports are too cheap for U.S. consumers, and, as a result, importsgreatly exceed exports.

Often in such situations, market forces will tend to push an overvalued dollarback down to a more sustainable level. However, this adjustment is currently

being impeded by the decision of several of our most important tradepartners (notably China) to spend hundreds of billions of dollars each year tobuy dollar-denominated assets, leading to an increase in the demand for, andthus the price of, dollars. During the boom years, the pros and cons of thisodd economic relationship—one in which much poorer trading partners lentus hundreds of billions of dollars each year—were less clear. The drain ondemand for U.S.-produced goods and services was counter-balanced to somedegree by the downward pressure on interest rates provided by the foreignmoney flowing into the country. But now, the U.S. economy is getting noboost from lower interest rates and the huge increase in domestic savingshas satisfied all new demands for debt. Yet the downside of the overvalueddollar remains: the United States exports too little and imports too much.

Engineering a decline in foreign purchase of dollar-denominated assets andallowing the dollar to decline during a period of high unemployment and lowinterest rates would provide a valuable stimulus to U.S. jobs. Yet, because fordecades the elite consensus on trade was that it must remain resolutelyunmanaged, or at least unmanaged by us (it is currently being activelymanaged by our trade partners), this avenue for stimulus remainsunexplored.

Monetary policyA similar adherence to orthodoxy hamstrings prospects for using monetarypolicy to spur job growth going forward. The traditional tool that the FederalReserve uses to fight recessions is lowering short-term interest rates, whichit controls directly (i.e., rates at which banks lend to each other and at whichthe Fed will loan directly to banks). The Fed hopes that by lowering theseshort-term rates, arbitrage will lead to a reduction in the longer-term ratesthat affect businesses’ decisions to borrow to build new factories andpurchase new equipment as well as families’ decisions to borrow to buythings like houses and cars.

These short-term rates currently sit essentially at zero, and yet the economyflounders. However, the Fed does have other tools. As emphasized in the

past research of current Fed Chair Ben Bernanke, the Fed could, for example,buy long-term debt and hence drive down long-term interest rates moredirectly—either on U.S. government debt or even more promisingly onprivate-sector debt. This could directly lower the relevant costs of borrowingin the private sector for businesses and households.

Additionally, the Fed could publicly announce that it will target a higher rateof inflation, which could help erode the huge overhang of private-sector debtthat is still keeping households and firms from undertaking new spending.All of these things, again, would fly in the face of orthodoxy that hasgoverned the U.S. economy in recent decades. And yet all of these would helpspur job growth. Pushing down interest rates on long-term (especiallyprivate) debt could encourage businesses and households to start spendingagain on new investment projects, real estate, and those consumer goodsthat require borrowing to buy. A higher rate of inflation would erode some ofthe debt hanging over household and business balance sheets. One reasonwhy so many think homes are a great investment is that for a time betweenthe late 1960s and early 1980s, inflation quickly eroded the value of manymortgage holders’ debt.

Fiscal policyPerhaps the most puzzling reticence among policy makers today is theirfailure to use further fiscal policy measures (i.e., something like anotherRecovery Act) to target a lower rate of unemployment. Given the successes ofthe Recovery Act (documented previously) and given that many of thepotential downsides of fiscal expansion have clearly not materialized, politicsalone seems to be in the way of using fiscal policy to spur economic activity.

The most-cited economic downside of larger federal budget deficits is the fearthat, as the government competes with private borrowers for savings,interest rates will spike and private-sector investment will be “crowded out.”However, this argument does not hold for an economy where householdsand private business are trying to vastly increase their savings, not take onmore debt. In this case, there is no competition for scarce savings, and there

is no upward pressure on interest rates. This means that there is no dangerthat private investment will be crowded out. Indeed, because the biggestdeterminant of firms’ investment decisions is their assessment of salesgrowth, the Recovery Act, by supporting household purchasing power andsalvaging potential customers for businesses, has surely crowded in businessinvestment that otherwise would have sagged even more.

The evidence firmly supports this sanguine view of interest rates—rates on30-year bonds are far lower than before the recession began and haveactually fallen since the passage of the Recovery Act. Clearly there are veryfew competitors to the federal government in looking to increase debt, henceinterest rate pressure is non-existent.

Yet fear (even hysteria) of larger deficits is constantly presented as thetrump card against those arguing for more fiscal support for the economy.Given that there’s no economic merit to this argument, and given that fearsof deficits have done little to derail proposals to lessen tax rates on theaffluent, its durability seems rooted in the odd Beltway ideology that simplyobjects to using public spending to ease Americans’ economic worries.

Clear economics, fuzzy politicsCan we be absolutely sure that more support to the economy (through fiscal,exchange, or monetary policies) will translate into a lower unemploymentrate and better prospects for finding jobs? Yes, absolutely. For all the talkabout “jobless recoveries” and hand-wringing over what causes them, onething is perfectly clear: faster overall growth translates into lowerunemployment, and the cause of past jobless recoveries is simply slower-than-average growth.

The good news is that we know how to spur this growth—the simplest pathis for the federal government to spend more and/or tax less as long asunemployment remains high. The government also needs to tolerate theresulting deficits to whatever degree it takes to get the job done. The better newsis that the fiscal costs of these deficits are at historic lows: the recession hasdriven the costs of borrowing to record lows. A similar strategy is needed for

monetary and exchange rate policies—more aggressive measures need to bepursued, as the costs of these policies are minimal in a depressed economy.

The bad news is simply that too many policy makers have either not absorbedthese economic truths or they simply object to upsetting the economicstrategy that has paid off well for their most-privileged constituents fordecades. Until they can be convinced, either of these economic truths or thepolitical rightness of sharing economic opportunity with a larger group, theprospects for an economic recovery are dim. Convincing some of them willrequire that they jettison a cherished idea that has gripped too many in thepolicy-making elite over the past three decades: deficits are always andeverywhere bad, and a smaller deficit is always a worthy policy target in andof itself. Convincing the others requires that they recognize the economicplight of those who don’t contribute to their campaigns. As the next sectionof this book makes clear, this is just one plank of the dominant economicstrategy of the past 30 years that must be replaced. But we should be clearabout this—until we change our policy course and affirmatively decide todesign a different economy, we will not get different results. Not for nothingdid Albert Einstein define insanity as “doing the same thing over and overagain but expecting different results.”

This adherence to economic doctrine, even in the face of clear evidence that itis ill-serving to the interests of most Americans, should be no surprise tothose who have followed the U.S. economy in the past 30 years. For decades,policies that promised to spur growth and raise living standards have failed todeliver for typical Americans but have provided previously unimaginedwealth for the most privileged slice of the American economy. Yet despitetheir failure to deliver the goods for most American families, there has beenno move to re-assess them. And this failure to challenge the Washingtonpolicy orthodoxy is, sadly, one thing that the Great Recession has so far notchanged.

FIGURE 19

Fast growth, falling unemployment; slow growth,rising unemployment

Eight-quarter change in GDP growth and unemployment,1983-present

Source: EPI analysis of Bureau of Economic Analysis and Bureau of Labor Statistics data.

Figure 19: It is no mystery what causes job growth: fastgrowth in economic output leads to fast growth in jobs,period. Getting serious about creating jobs meansspurring economic growth. The very rapid improvementin the unemployment rate following the 1982 peak wasno mystery—it was simply driven by very rapid overall

economic growth.

The Cracked Foundation Revealed by theGreat Recession

Just as Hurricane Katrina revealed underlying weaknesses in the physical,economic, and social infrastructure of New Orleans, the Great Recession hasrevealed similar weaknesses in the overall American economy.

In the quarter-century following World War II, economic growth in theUnited States was rapid and equitably distributed. To be sure, social andeconomic inequalities were rife, but the trajectory for the typical Americanfamily was steady economic progress. Beginning in the late 1970s, thistrajectory flattened as wage growth slowed to a crawl. Any increases in thetypical families’ living standards thereafter were essentially bought throughincreased working time and less savings.

The past 30 years has seen a number of important trends that were theresult of specific policy decisions: the consistent erosion of the minimumwage’s purchasing power; a rapid decline in the power of organized labor; arapid increase in the share of the U.S. economy that has been exposed toglobal competition; a dismantling of regulations that governed the financialsector; and a shift to monetary and fiscal policies that favor budget balanceand low rates of inflation over the insurance of full employment. All of theseshifts have, predictably, battered the bargaining power of typical Americanworkers to the benefit of our society’s most privileged.

Falling minimum wageIn 1968, the inflation-adjusted value of the minimum wage was $8.54 in 2009dollars. For almost the next 40 years, its value marched downward, arrestedonly occasionally by Congressional action. By 2006, after nearly a decadewithout a raise, this value had fallen to $5.48, the lowest on record. Raisessince 2006 pushed its value back up to $7.25, still far short of the value thatprevailed 40 years ago—and this in an economy that had seen economicoutput per worker rise by almost 80% in those 40 years.

Assault on workers’ right to organizeIn 1973, roughly a quarter of private-sector workers belonged to a union(and slightly more were covered by a union contract). By 2007, this coveragehad fallen by two-thirds to 7.5%. While some of this fall could be attributedto a changing economy—especially a unionized manufacturing sector thatwas shrinking as a share of the total economy—most of the decline was dueto increased employer aggressiveness in fighting unions. This can be seen bycontrasting this fall in private-sector unionization with the sharp increase inpublic-sector union coverage. Public employers are generally barred fromfighting unionization drives as aggressively as private-sector employers.Given this more neutral setting, workers in this sector have chosen tounionize in greater numbers in recent decades. And much research indicatesthat the desire for unionization is as strong as ever (or stronger) amongAmerican workers, yet employer intransigence keeps this increased desirefrom translating into new union members.

Global integration for America’s workers andinsulation for elitesA key factor in the decline of private-sector unionization, especially in themanufacturing sector, has been the growing openness of the Americaneconomy to global competition. The possibility of implicitly replacingAmerican workers with imports has shifted bargaining power away fromthese workers and has directly stunted wage growth as well as made it harderto unionize. While the rise of globalization has been facilitated by technologyand policy decisions made abroad, the consensus of economic elites in theUnited States has been to accommodate and accelerate the integration of theU.S. and global economies—or at least to integrate their labor markets sothat rank-and-file American workers must compete with the rest of theworld. The result has been a predictable leveling of the wages of theseAmerican workers. Conversely, those workers and capital owners that wereshielded from the downsides of global competition have seen their incomessoar.

The rise of financeA large share of those individuals who have seen their incomes soar in thepast 30 years work in the financial sector. The share of the economyaccounted for by salaries and profits in this sector has multiplied. Yet thecore function of the finance sector—providing the liquidity and risk-management that eases investment in capital and equipment for othersectors—has not been performed any more efficiently over these threedecades.

After the Great Depression saw an unregulated financial sector collapse andcontribute to bringing down the rest of the economy, regulations were putinto place to prevent a repeat performance. These regulations worked well—large-scale financial crises in the U.S. economy were rare and did notthreaten to bring down the larger economy for decades after the GreatDepression. Starting in the late 1970s, however, these rules have been underconstant assault. By the early 2000s, the Federal Reserve Chairman AlanGreenspan has stated that he assumed this sector’s own “self-interest” to besufficient to ensure stability in the sector, and even in 2008 he wrote that hefeared a “casualty” of the financial crisis would be “financial self-regulation,as the fundamental balance mechanism for global finance.” The wholesaledismantling of these rules led to huge increases in the sector’s returns, buthindsight shows that these gains were due predominantly to taking on riskierbets, which paid off big in the short-run but then blew up. Clearly, thedismantling of these rules did not serve the broader economy well.

The intersection of globalization and a deregulated financial sector meantthat even international lending went almost completely unsupervised. Whenmany of the important trading partners of the United States (most notablyChina) began buying trillions of dollars of dollar-denominated assets, thispresented policy makers a clear choice. They chose the short-termpreferences of the financial sector over the short-term preferences of themanufacturing sector and the long-run health of the overall economy.

This purchase of dollar-denominated debt helped U.S. financial firms byproviding them access to cheap money that they could then lend out at a

premium. But these purchases also hammered manufacturing firms andtheir workers producing in the United States, as they led to a large increase inthe value of the U.S. dollar. The rising dollar made U.S. exports expensive onworld markets while other nations’ imports became artificially cheap toAmerican consumers. The result was a trade deficit and hemorrhaging jobs inAmerican manufacturing. Besides presenting this trade-off, the foreignborrowing was also providing further fuel for the housing bubble and wasclearly not sustainable in the longer run. So did the economic policy-makingelite call for an end to this destructive pattern of international lending? Theydid not—instead they made up rationales for why there was no housingbubble, why the trade deficits caused by foreign lending were just fine, andwhy U.S. manufacturing was doomed no matter what.

Abandoning full employment as a targetThis pattern of choosing the policy preferences of those in finance over thoseof workers can also be seen in the push over the past three decades toredefine the central mandate of the Federal Reserve. The Fed’s role has beennarrowed to targeting a very low rate of inflation rather than pursuingpolicies that would promote full employment for the American workforce.Despite the fact that the Humphrey-Hawkins Act of 1978 (since expired)called for “full employment” to be a goal for economic policy makers, afterthe 1970s, a decade that saw inflation erode the returns to lenders, theFederal Reserve has repeatedly chosen to sacrifice full employment in thename of fighting (real or imagined) inflation.

Since the bargaining power of low- and middle-income workers is mostaffected by the unemployment rate, a government policy that de-emphasizesthe importance of a low unemployment rate harms them the most. In recentdecades, many economists and the policy-making elite ratified this shift byclaiming that the “natural rate of employment”—the rate of unemploymentbelow which inflation would begin to accelerate—had risen over time, andthat any attempt to push unemployment back down to levels frequentlyenjoyed in the 1950s and 1960s would unleash galloping inflation. Critics ofthis view were labeled modern-day Luddites, yet a brief episode in the middle

and late 1990s proved the supposed Luddites correct.

Buoyed by a bubble in the stock market that began inflating historicallyquickly in the mid-1990s, demand in the U.S. economy actually begangrowing fast enough for the unemployment rate to fall well below whateconomists had claimed would spark inflation. Federal Reserve Chair AlanGreenspan decided not to short-circuit this growth. While this growth wasbased on an unsustainable foundation and eventually faltered, during thetime the economy grew quickly, the unemployment rate dipped below 4% fora time and wage growth was rapid across the board. The end of this boomwas not caused by an economy overheating due to inflationary pressuresspurred by the low unemployment rate—on the contrary, inflation did notbudge even as the unemployment rate fell. Instead, the bursting of the stockmarket bubble brought the boom to an end.

The lessons of this episode should be clear: (a) fast growth and lowunemployment are necessary for broad-based wage growth and can beaccommodated without sparking inflation, but (b) we need to find moresustainable ways to support this growth than bubbles in financial markets.

FIGURE 20

Declining minimum wageThe real value of the minimum wage, 1960-2009

Source: U.S. Department of Labor, Wage, and Hour Division and Bureau of Labor Statistics.

Figure 20: After each legislated increase, inflationnaturally erodes the purchasing power of the minimumwage. Long periods of neglect in the 1980s, 1990s, and2000s led to it reaching its lowest level on record in 2006.And even increases since then have kept it far below itshistoric peak.

FIGURE 21

Declining unionizationUnion coverage rate in the United States, 1973-2009

Note: Data for years 1973-76 were imputed using the annual percent change in unionmembership for those years.

Source: Hirsch and Macpherson (2010) and Bureau of Labor Statistics

Figure 21: Union coverage has steadily eroded since1973.

FIGURE 22

Growing integration into the global economyImports and exports as a percent of GDP, 1947-present

Source: Bureau of Economic Analysis data.

Figure 22: A growing share of the U.S. economy has beenintegrated into a global economy that is much poorer onaverage.

FIGURE 23

Less manufacturing, more financeManufacturing and financial sectors as share of private

economy*

*Compensation plus corporate profits only.

Source: EPI analysis of Bureau of Economic Analysis data.

Figure 23: Starting in the 1980s, the share of theeconomy accounted for by the financial sector beganrising, while the steady-but-measured decline ofmanufacturing’s share sped up radically. By the 2000s,the two sectors were of roughly equal heft.

FIGURE 24

Missing the targetThe NAIRU versus actual unemployment rate

Source: Congressional Budget Office and Bureau of Labor Statistics data.

Figure 24: The official estimate of the “NAIRU”—the rateof unemployment below which the economy cannot gowithout sparking galloping inflation—is often too highand keeps policy makers from providing jobs to all whowant one. However, the past 30 years has seen even thisconservative target being routinely missed on the highside. The previous 30 years saw actual rates below theNAIRU as often as above. Not so since.

You get the economy you chooseAll of these policy choices—what is the value of the minimum wage; the legalboundaries regarding the fight between workers and employers over unionorganizing; which American workers are provided bulwarks against thepressures of globalization; how much freedom the financial sector has toself-regulate; how much oversight there is over international trade andlending patterns; what is the appropriate inflation level and what is theappropriate unemployment rate—are choices, not weather patterns.

These choices—while designed to do something else—were sold to the publicbased on promises that they would unleash a flood of economic efficiencyand boost living standards for everyone. They have manifestly failed todeliver for most working Americans. Growth in productivity—how muchincome can be generated in an hour of work—slowed even while the fruits ofthis slower increase were claimed by a smaller, privileged slice of theAmerican economy.

This failure, however, does not guarantee that these choices will be reversed,for while their result has been disastrous for the typical American family, ithas been an unalloyed boon for the economic elite. Changing course willrequire the richest among us to get used to income growth that more closelymatches that seen by their fellow Americans. It will require that the barriersthey have erected to keep their own incomes safe from real competition aredismantled. Lastly, it will require that they accept the need to prevent or limitmany of the financial activities that led to strato-spheric incomes, in order tokeep them from harming the broader economy.

Reversing the economic strategy of the past three decades, one supported bythe richest and most powerful, won’t be easy. What the Great Recession hasshown, however, is that it is necessary. Besides failing to deliver broad-basedgrowth in living standards, this strategy relied on ever-rising debt and assetmarket bubbles that were allowed to inflate to disastrous proportions tokeep consumers buying and the economy humming. These are not durablefoundations for growth.

Going forward, growth should be based on widespread wage gains for allworkers who will use them to purchase a rising living standard withouttaking on more and more debt. This task will be easier if rising wages areaccompanied by guarantees of basic economic security—that sickness,injury, or other instances of plain bad luck will not consign one to poverty fora lifetime.

An economy based on broad prosperity and security, rather than one basedon small pockets of opulence surrounded by insecurity and struggle, will notjust make us a better society, it will make our economy more stable andprevent another Great Recession. If there is anything we should have learnedfrom the past two years, it is the importance of not trying to build theeconomy’s foundation in sand.

Incomes in the 30 years before the Great Recession:growing slower and less equalIn the quarter-century between 1947 and 1973, economic growth was bothrapid and distributed equally across income classes. The poorest 20% offamilies saw growth at least as rapid as the richest 20% of families, andeverybody in between experienced similar rates of living standards’ growth.

Since then, growth in average living standards has unambiguously slowed.Between 1973 and 1995, growth in productivity, or how much income can begenerated in each hour of work, collapsed to less than half the rate thatcharacterized the previous quarter-century. Since 1995, productivity growthhas risen sharply but remains well below the progress that prevailed between1947 and 1973.

And this slower growth has been accompanied by a stunning rise ininequality. The growth of typical families’ incomes, which once mirroredoverall productivity growth, began flattening in the late 1970s, falling farbehind productivity growth. And the poorest families saw income growththat lagged families in the middle of the income scale, who in turn lagged therichest families.

The upward march of inequality has not been totally uninterrupted: whenbetween 1996 and 2000 the Federal Reserve allowed unemployment rates tocreep down well below what most economists insisted was possible, wagesacross the board began rising at a brisk pace. This was just one starkreminder that economic policy matters for both the pace and distribution ofeconomic growth.

However, after a brief decline in inequality following the stock market crashof 2001, the older patterns reasserted themselves and inequality beganmarching upward faster than ever. It is this inequality and slowdown inproductivity that is the clearest evidence that, from the perspective of typicalAmerican families, our economy has been underperforming relative to itspotential for decades before the Great Recession.

FIGURE 25

"Fast-and-fair" versus "slow-and-skewed"Real family income growth by quintile, 1947-73 and

1979-2009

Source: : EPI analysis of U.S. Census Bureau data.

Figure 25: Fast-and-fair income growth versus slow-and-skewed. The “picket fence” bars—those columns showingincome growth from 1947-73, are both higher in eachquintile and of roughly even heights. The “staircase” bars—those columns showing income growth from 1979-2009, are lower for each quintile but showing faster

growth the farther up the income scale you go.

FIGURE 26

Where did the growth go?Share of pre-tax income growth, 1979-2007

Source: EPI analysis of CBO Average Federal Tax Rates and Income, 2010.

Figure 26: The top 10% of the income distribution hasclaimed just under two-thirds of all income gains since19